On pensions, Kentucky should heed W. Virginia’s hard-learned lessons

Sticker worn by educators during a Lexington town hall meeting last month about the state pension crisis
Sticker worn by educators during a Lexington town hall meeting last month about the state pension crisis

Gov. Matt Bevin and the Kentucky legislature are about to make a terrible mistake with the pension plans of public employees — one that West Virginia made. Switching newly hired public employees to a defined contribution 401(k)-style account will hurt Kentucky and its public employees.

In the late ‘80s, West Virginia was facing financial difficulties. The state was months behind in paying income tax refunds to residents. Our health insurance program for public employees was so far behind in paying claims that many doctors stopped accepting state employees as patients. Most of all, our teacher pension system was reportedly the worst funded in the nation with over $7 billion in unfunded liabilities and only $300 million in assets.

In 1990, Gaston Caperton was elected governor. One of his goals was to fix the system and its unfunded liability. The governor and legislative leaders pushed a defined contribution plan to replace the pension system for new hires. In 1991, with all branches of government on board, the switch was made, and the defined-benefit pension system for education employees was closed to new participants.

The new 401(k)-style plan was fraught with problems. Initially there were only seven investment options to choose from. Some of the options mirrored each other and didn’t properly allow for investment diversification. Additionally, the state offered no education for participants.

With nowhere to go for investment advice, education employees were expected to make sound investment decisions. Many participants suffered greatly since they did not have the investment know-how of investment professionals.

By 2005 it became clear the 401(k) system would not provide an adequate retirement for its participants. Among education employees who were 60 years old with 15 years of experience, 83.5 percent had an average savings in their 401(k) of $23,193, only 2 percent had a balance above $100,000. Among all participants, the average retirement savings was only $33,000 — clearly not enough to retire on.

Additionally, the state was now having to pay toward the existing unfunded liability of TRS and pay for the new 401(k) plan as well. This placed an additional burden on the state’s finances and was one of many unintended consequence of creating the new retirement system.

Seeing the writing on the wall, then-governor, now Sen. Joe Manchin worked with the legislature to reopen the defined benefit pension system and close the 401(k) plan. In 2008, the state gave education employees in the 401(k)-style plan the option to join the reopened defined benefit pension plan. Nearly 80 percent made the switch.

West Virginia ultimately did the right thing. We provided for a stable, secure retirement for our employees, and we developed a plan to pay down the debt in the TRS pension plan. That commitment to our pension plan has been held up as a model and has turned our worst funded pension plan into one that is over 62 percent funded.

Closing the pension plan would be a terrible policy decision for Kentucky as well as a bad decision for the retirement security of Kentucky’s public employees.

West Virginia made this mistake. I urge state lawmakers in Kentucky, and Bevin, not to make the same mistake we did.

Placing newly hired public employees in 401(k) plans will only saddle your state with more debt and cause hard-working public employees to lose their retirement security. This will have disastrous consequences on local economies and cause a recruitment and retention nightmare for local police, teachers, and fire service professionals.

Do the right thing: Pay your bills, stop kicking the can down the road and fund your pension system.

David Haney is executive director of the West Virginia Education Association.He has served on numerous committees and commissions, including those dealing with finances, public retirement and investment management.